Commission approves €18bn in aid for Commerzbank

The European Commission announced today (7 May) that it has approved a capital injection of €18 billion for Commerzbank. The Commission agreed to authorise the aid in exchange for commitments from the bank to sell off subsidiaries and refrain from merger activity.

Both the German government and Commerzbank have said that the aid is needed to shore up the bank’s finances. Peer Steinbrück, Germany’s finance minister, last month criticised the Commission for taking too long to approve the aid.

Neelie Kroes, the European commissioner for competition, said she was satisfied that the aid “will guarantee the fundamental soundness of Commerzbank, and that sufficient measures are taken to mitigate distortions of competition”.

Commerzbank, currently Germany’s second largest private bank, agreed to sell off several subsidiaries including Eurohypo, a significant player in the European real estate market. The bank estimates that the divestments will reduce its balance-sheet from €1,100bn to €600bn. The bank has agreed not to pay dividends in 2009 and to refrain for three years from merger activity involving financial institutions or other potential competitors.

The Commission’s decision means that Commerzbank will not have to pay back an €8bn capital injection provided by the German government in December and can receive a further €10bn promised by Germany’s Financial Market Stabilisation Agency in January.

Steinbrück claimed in April that uncertainty over whether the aid would receive Commission-approval was placing Commerzbank at a competitive disadvantage. Kroes said that the Commission had had “constructive contacts with the German authorities” and that its approval-process was about “asking the right questions and helping banks to have the right answers”.

Kroes announced that the Commission has opened an in-depth investigation into German government aid for another bank, Hypo Real Estate. She said that “more may need to be done to limit distortions of competition caused by the aid, especially given the large amount of aid received”. The German government wants to prolong guarantees to the bank worth €87bn.

The Commission also announced an extension of its investigation into the UK government’s rescue of Northern Rock, because of changes to the restructuring plan.